China Gold imports 2014; Important Q4 distortions – explained

China’s net gold imports from Hong Kong totalled 813 tonnes in 2014, a 30% year-on-year decline from the 1,158 tonnes recorded in 2013. Samson Li, Senior Precious Metals Analyst at GFMS, examines Q4’s results and whether they will spill over to 2015.

The 30% year-on-year decline in China’s net gold imports from Hong Kong is broadly in line with GFMS team’s estimate on China’s jewellery fabrication, which fell 33% to an estimated 608 tonnes in 2014. This should be no surprise to anyone really, as Shenzhen is the major hub of jewellery fabrication in China, and getting gold through Hong Kong is the cheapest and most direct route.

Gold imports from Hong Kong do not represent the whole picture though, as Shanghai and Beijing can both directly import gold from foreign markets. According to sources who have spoken to GFMS, direct gold shipments to Shanghai in 2014 are estimated to have about 30% of the country’s total gold imports, while direct shipments to Beijing are still at relatively low levels. Transportation costs and logistic issues are still major obstacles while considering direct shipments to Shanghai and Beijing, especially for the latter.

Although it is expected that direct shipments to Shanghai will continue to increase (in terms of the overall proportion) down the line, we still believe gold imports using Hong Kong as the primary conduit will remain dominant in the medium term.

An influx of gold imports in Q4

After disappointing for two consecutive quarters, China’s gold imports increased significantly during the fourth quarter last year. Other than the seasonal demand influence, another important factor that should be considered was that while gold bullion imports increased during this period, this was not being fully supported by grass roots consumer demand.

Licensed importers need to import a minimum amount of gold bullion per year to demonstrate to government authorities that they have put their import license to good use. Therefore, after a series of relatively weak import numbers in the second and third quarters, importers had some catching-up to do by the fourth quarter.

While the levels of Chinese gold premium against the international benchmark would have a direct influence on how much gold traders decide to import, evidence has suggested that this is not the only factor that importers would look at. China’s net gold imports from Hong Kong during the second quarter of last year amounted to 160 tonnes, while the average premium during that period was $0.90 per ounce; net gold imports dropped by 27% quarter-to-quarter to 117 tonnes in the third, but average premium rose to $2.33 per ounce.

Looking more closely during July and August when net imports were both less than 30 tonnes per month, average gold premium was still $1.58 per ounce during that span. Chinese importers somehow decided to ignore this arbitrage opportunity that could import even more gold into the country until the local price would drop to a level that is on par with its international benchmark.

How will the 2015 volume measure up?

After a record year in 2013, most industry participants expected a downturn in the level of Chinese gold imports and demand in 2014, with the sizable drop in fabrication demand of over a third perhaps better than many had initially expected.

Now the true test begins as we are eager to see how the 2015 volume will fare against 2014 results. Recent field research would suggest demand on the ground is building ahead of the Chinese New Year holiday. The question remains though: will demand evaporate after the gifting season, as was the case last year, or will we see China’s appetite for gold reawaken, and return to growth, after taking a breather last year?

Samson Li is a Senior Precious Metals Analyst on the GFMS team at Thomson Reuters, specializing in precious metals demand in the Asia region, with an emphasis in China. Prior to joining GFMS, Samson worked for eight years as the Chief Analyst of an asset management firm, responsible for global economy forecasts, research on the commodities market, as well as fund management in the global mining equities sector.

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